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The Bond Market Bodes Badly for the Euro's Eye-Watering Surge

(Bloomberg) -- A rallying euro may have hit a glass ceiling put in place by European Central Bank policy makers.

The fact that the currency has outrun its companion gauge in the bond market -- the interest-rate differential -- suggests a cap for the euro’s advance, according to Societe Generale SA strategist Kit Juckes. The measure refers to the extra yield investors demand to own 10-year U.S. Treasuries versus similar-maturity German government bonds.

“The euro rally has gone too far relative to rates,” Juckes said. “For all that monetary accommodation, we’ve traded in a small range since the ECB unleashed quantitative easing in 2015 and there’s a danger the ECB will sound dovish for a while yet.”

Already there were signs the rally that took the common currency to its highest closing level since September 2016 this week had run out of steam, after Tuesday’s 0.5 percent drop.

It will only get more vulnerable as the officials around Mario Draghi become open about their disagreement over how to exit unconventional stimulus in the run-up to their June 8 rate meeting.

Peter Praet, the ECB’s chief economist in charge of crafting policy proposals, said a nascent recovery in the euro zone remains fragile and will founder without a “very substantial degree of monetary accommodation” in remarks in a prepared speech Wednesday. His go-slow approach contrasts with that of Benoit Coeure, who is responsible for market operations, and has warned that withdrawing too gingerly could eventually lead to a bigger shock.

“The market has moved faster than the ECB but I suspect you’ll get Draghi saying the ECB isn’t ready to taper right now and we need to chop some wood,” Juckes said. “We may see a correction before the next push higher.”